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All enterprises and other income receiving organizations (excluding sole proprietorship enterprises and partnership enterprise) within China shall be the taxpayers of the enterprise income tax. The enterprises are classified into resident enterprises and non-resident enterprises.
Enterprise income tax shall be calculated on the basis of a tax year, which shall commence on January 1, and end on December 31 of each calendar year.
Provisional enterprise income tax shall be paid in advance on a monthly or quarterly basis, finally settled at the end of the year, refunded for any overpayment or supplemented for any deficiency. In other words, an enterprise shall, within 15 days after the end of each month or quarter, submit provisional enterprise income tax returns and make provisional tax payments to the tax authority. The enterprise shall submit an annual enterprise income tax return to the tax authority and settle the amount of tax payable or refundable within 5 months after the end of each year.
On 1 August 2014 China's new regulation on tax for non-resident international transportation enterprises came into force. The new regulation is in the form of Notice on Provisional Measures on the Collection of Tax on Non-Resident Taxpayers Engaged in International Transportation Business, which repeals several previous regulations touching in on this area; it brings about major changes on how non-resident transport businesses are taxed.
The new regulation applies to non-resident foreign enterprises who are engaged in the provision of services for international transportation of passengers, cargo, posts or others in and out of China using their own, chartered or leased aircraft, vessel or slot, including any stevedore, warehousing and other services connected with the transportation.
A non-resident foreign enterprise is an enterprise incorporated outside China in accordance with foreign laws. It is irrelevant whether or not the non-resident foreign enterprises have offices or branches in China.
For the purpose of the new regulation, international transportation services include time and voyage charters of vessels and wet leasing arrangements of aircrafts.
However, demise charters of vessels, dry leasing of aircrafts and container leasing are exempted from the scope of the new tax regulation, and enterprise income tax will be levied upon them in accordance with China's Enterprise Income Tax Law which means that their position remains the same as it was prior to the new regulation coming into effect.
Unlike the old regime, non-resident foreign enterprises that are engaged in the international transportation services are now liable for Chinese enterprise income tax on revenues earned from transportation services both into China and out of China.
Tax is levied on the actual total income received for the provision of the transportation passing through the Chinese ports. This includes transportation both into China and out of China.
The actual total income includes freight and surcharges for cargo transport.
For passengers transport, ticket revenues, excess baggage charges, insurance premium and any charges for other services and entertainment on board are included. Allowance is made for deductible expenses, which are actually and reasonably incurred during the course of the business. Actual total income less deductible expenses is the taxable income.
If the non-resident taxpayer does not declare the taxable income, the Chinese tax authority will conduct an assessment to determine an estimated taxable income and use that as the basis for calculating the tax.
For the purpose of calculating the estimated taxable income, under the new regulation, the Chinese tax authority will apply a profit rate of no less than 15% to the total actual income of the non-resident foreign enterprise.
Under the new regulation, the applicable tax rate for a non-resident international transportation enterprise may be 10% or 25% depending on the nature of the taxable income and the method by which tax is collected.
For example, a non-resident shipping company which provides transportation passing through the Chinese ports may need to pay a tax rate of 25% on income earned under a time charter or voyage charter; whereas a non-resident shipping company which charters its vessel to a Chinese entity on a bareboat charter basis still only needs to pay 10% on income earned under a bareboat charter (also known as a demise charter) unless it is waived under a tax treaty between China and the home state of the non-resident shipping company.
Which tax rate is applicable to a non-resident international transportation enterprise is a technical point and specialist tax advice will be necessary in many cases.
Non-resident taxpayer enterprises must register with the Chinese tax authority within 30 days after signing the transportation agreement or obtaining their business licenses in China. They can register with the Chinese tax authority themselves or use a proxy to complete the registration on their behalf. Copies of the business license and relevant agreements, together with contact details of the local resident representative or agent, need to be provided to register.
If the non-resident taxpayer enterprise operates at different locations in China, it only needs to register at one location with the tax authority at its own choice. When it transacts business at other locations, the non-resident taxpayer needs to file copies of its tax registration certificate together with copies of the transport service agreements at the local tax authorities in those other locations to keep them informed.
Once registered, the non-resident enterprises should keep records of their business accounts and tax payments for inspection by the Chinese tax authorities.
Non-resident taxpayer enterprises who are not registered with the Chinese tax authority or who have not declared their taxable income to the Chinese tax authority are liable for withholding tax to be collected via their Chinese counterparties.
The Chinese counterparties will act as the withholding agent who will withhold such tax from the payments they make to the non-resident foreign enterprises under transportation service agreements.
Chinese withholding agents can be entities or individuals who makes payments to the subsidiaries, branch or representative offices of non-resident foreign enterprises, or agents in China who collect payments on their behalf; and those who make payments through their associated companies to the non-resident foreign enterprises.
Under the new regulation, the withholding agent should apply a minimum of 15% profit rate to calculate the taxable income of the non-resident taxpayer.
By way of example, if the applicable tax rate is 25%, the minimum tax, which a Chinese charterer can withhold from a charter hire of USD 1 million, will be USD 37,500 (USD1 million x 15%x25%).
Non-resident foreign enterprises can rely on tax treaties between their home states and China to apply for exemption from enterprise income tax liability under the new regulation.
Strict filing procedures are required. Non-resident foreign enterprises must file an application to the Chinese tax authority with supporting documents to prove business registration in the home state, the relevant transportation agreements to which they are party and any other necessary documents to prove its entitlement to the benefits under the tax treaties as required by the Chinese tax authority.
If the tax treaties cover waiver or exemption of any tax other than enterprise income tax, such exemption will also apply and will not be limited to enterprise income tax.
The new regulation broadens the range of international transportation companies who may find themselves liable for Chinese enterprise income tax on profits generated from international transportation services passing through Chinese ports. In addition, the applicable tax rates have also been significantly increased.
For the shipping world, foreign ship owners/operators who have offices or branches in China will need conduct a compliance check and register with the Chinese tax authority and comply with the enterprise income tax payment requirement under Chinese law. Those foreign ship owners/operators who have no offices or branches in China, may need to consider and negotiate carefully the withholding tax provisions in their contracts with Chinese counterparties to ensure that withholding tax is deducted properly.
Finally, always remember to check if any tax treaties exist between China and the relevant home state and benefit from any waiver or exemption in the tax treaties.